Property exposure through closed-ended funds

Real estate investment trusts (Reits) and other closed-ended property investment trusts are also available to clients seeking property exposure in their portfolios.

Reits and other closed-ended funds are listed companies that make property investments.

Instead of holding a share of the underlying holdings, investors own stock in the Reit, which can get round the liquidity issue as the shares are traded on an exchange.

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), says: “Reits and other closed-ended property funds are an alternative to property open-ended funds.

“The closed-ended structure comes into its own over the long-term when investors can sit out the inevitable economic wobbles and their impact on the commercial property sector.

“Investment company managers do not have to worry about inflows of hot money and outflows when times are tough and buyers are hard to find, but can concentrate solely on the long-term performance of the portfolio.”

According to Russ Mould, investment director at pensions specialist AJ Bell, pension investors in particular might be wise to seek advice on whether to add property investment trusts to their portfolios.

Property investment companies, due to the nature of the asset class, are on average among the more highly geared sectors

Annabel Brodie-Smith

He comments: “Property investment trusts currently offer yearly dividends of 5 per cent and discounts to net asset value (NAV) of 9 per cent on average.

“Investment trusts have not been forced to suspend withdrawals, as their shares are not traded on the open market and their access to permanent capital means they are not obliged to sell the underlying property investments if investors want to cash out.”

Indeed, he highlighted AIC research that showed post Brexit, the average discount to the NAV for UK property investment trusts is 9.4 per cent, “potentially offering value compared with the long-term trend over the past three years”.

Table 1: UK property investment trusts from 23 June to 20 July

Investment company

Share price since Brexit vote*

Dividend

Yield

Discount

to NAV

Drum Income Plus REIT

5.25%.

n/a

13.6%

AEW UK REIT

-4.5%

5.8%

-1.7%

Standard Life Investments Property Income

-7.4%

6.1%

-6.1%

Ediston Property

-8.2%

5.5%

-7.6%

Regional REIT

-9.8%

7.1%

-9.3%

F&C Commercial Property

-2.4%

4.9%

-9.5%

UK Commercial Property

-2.6%

4.8%

-10.6%

Picton Property Income

-2.5%

4.8%

-10.9%

Schroder Real Estate

-4.1%

4.7%

-11.2%

F&C UK Real Estate

-5.9%

5.7%

-11.5%

AVERAGE

-4.7%

5.1%

-9.4%

Source: AIC/Morningstar/Thomson Reuters Datastream/QuotedData

Moreover, there have been positive news stories from the listed investment trust sector. For example the Drum Income Plus Reit saw no change to its share price post-Brexit.

Because it invests in smaller properties in regional locations, it can - says James Carthew, head of research for QuotedData - “target smaller properties in regional locations where it can achieve higher yields because there is less competition”. As at 11 July, it had a yield of 5.1 per cent.

Also, at the time this guide was published, Derwent, a FTSE 250-listed Reit had a current dividend per share of more than 40p; its underlying fundamentals show a strong trajectory over recent years, despite the post-Brexit hiccup.

Derwent’s fundamentals Source: London Stock Exchange/Morningstar

Reits must, by their nature, pay out 90 per cent of the income they receive, which means “many trade on attractive yields”, says Mr Carthew.

Reits can also stash up to 10 per cent of their income away during good times, helping to smooth returns for investors when there is a rainy day.